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tv   Options Action  CNBC  October 25, 2009 6:00am-6:29am EDT

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i'm melissa lee. welcome to "options action." in philadelphia and today las vegas, tonight three stories that could make you money next week. option prices have hit their lowest level next year but could they go lower? plus, we'll tell you how to play the casino earnings for less. let's get into money right now. the unrelenting fall of the vix continuing, despite today's jump we're still back to pre-lehman levels. is the options markets sounding the all-clear here? we always say the vix is the measure of fear out there. with it coming down, does that mean fear is sucked out of the market? >> what i'm looking at is another magic number. it has a zero on it. just like the dow hits 10,000, just like the spx hits 1,000 and then 1,100. now the vix is going to go to 20. is the whole world changing? no. this means the markets aren't moving around as much. i'll clue you in to something.
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talking a percentage basis, if the stocks trading $25 and it moves $1, versus a $50 stock moving $1, all the prices have elevated, the percentage moving is obviously a whole lot lower, but the market is still moving about $1. >> and let's remember what the vix measures. the vix measures the cost of options on the s&p. there are lots where options are pretty expensive. we'll talk about some of those. just because the vix comes down doesn't mean it's necessarily cheap. it's fairly expensive given where it is historically. and this is not the new normal. this is the old normal. we're back to the way where things used to be where 20 in the vix was actually a pricey level. >> right. we're nearing historical levels and that's important to remember. even though we heard 80, et cetera, et cetera. we're back to historical norms. dan, when investors are taking a look at the vix, they're using it as a proxy for options prices, what scott mentioned is very key. what a lot of people want to know, isn't now a good time to
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buy protection with the vix at 20? >> it could be, melissa. listen, scott and mike and stacey, they're all really fancy traders. me, i'm just your average investor stock guy here. when i see vix back at its 20-year average, around 20, i don't make any overreaching judgments about options, because i'm looking at individual stories. so what i do is i start out making certain fundamental decisions about securities i want to invest in. then i make quantitative decisions and see what the options market is pricing in individual names, then i will figure out the best structure to do so. my advice is really to look at it by single stocks or by sectors in that regard rather than making some overreaching assumeses about volatility. >> you're not going to believe this at all. i agree with dan. now let's lay out the groundwork. i agree with everything that was said here. a couple of key points. who cares if the vix is 20. really? what are we going to do? who cares that it's 20.
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it doesn't mean anything about the market in terms in individual stocks. that's where i 100% agree with dan. let's think about why the vix is where it is. we've stopped moving. mike talked about that. october, one move we've seen plus or minus two percentage a day. september one of those. august one of those. we're just not moving as much which is why the vix is coming in. the s.p.y., which is what the vix is based on, we're seeing sell puts slightly out of the money versus buying way out of the money puts here. this is actually keeping the volatility level down as well. they're saying we're not concerned about the 5%, 10% pullbacks. it's still priced into the market. they want protection down 20%, 25%. that fear hasn't gone away. just because the vix is 20, doesn't mean people don't want protection down 25%, but when you're looking at an individual name, to dan's point, it's an individual name. >> we have to look at individual stocks in individual sectors.
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one sector will be squarely in focus is the energy sector. take a look at this calendar. all these major integrated oil companies, refiners all reporting next week. mike, you got a trade on valero here. >> what i'm taking a look at doing, valero was upgraded today. it was one of the few names in the energy space. they were all disappointing results today because schlumberger came out with numbers today and they weren't all that attractive. the stock was trading $20.80. when i was taking a look at this, i was looking to sell the november 21 put. it was trading for about $1.20. the stock was up about 60 cents at the time. one of the interesting things i point out about a refiner. refiners typically, it's a business that doesn't have such huge upside potential. there's a certain bit of a margin compression issue due to competition. they have a little bit of an edge relative to the other refiners. i don't mind getting long this
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stock around 19.80, the worst thing that happens if the stock comes in. it's almost 5% of the stock price. 5% over the 28 data experts. >> profit about $19.80 and you're willing to get long that stock, placing a limit order. it's like a limit order. just like placing that limit order on -- >> very similar to that to be sure. the one big difference if the stock went down to $20 and then went up to $30 i'd be long at that level. >> i want to butt in because we talked about this strategy, you know, a couple of weeks ago in bank of america. i don't love really doing this at the money before the event. i don't think you're giving yourself enough room. one of the four times a year where the companies have the most uncertainty. companies go into quiet periods the week before they announce earnings and are not saying a whole heck of a lot. i don't 0 love the risk/reward. >> that's one of the reasons i like to do this. we've noted it's really hard for stocks to move outside the
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implied range. we've certainly seen that during this earnings season. i kind of expect that here. so i'm trying to take advantage of the fact that that rarely happens, especially later in the earnings cycle. could i be wrong? maybe. i'm taking a bullish bet here. i'm trying to bring down my cost average basically on a long position. and i'm trying to take advantage of the fact that the prices are typically elevated before the catalyst comes up. >> the thing this, the options prices, the at the money options are the juiciest options. they're the ones you want to sell. the only problem with this trade that i see is oil names tend to have low implied volatility. options tend to be pretty cheap even before this sort of earnings cycle or catalyst. that's the only caveat. >> i would agree with that wholeheartedly and that's why i chose this name. because it's a refiner, i thought the potential for a big movement was somewhat more limited. and on a relative basis and the percentage you're going to collect was a little bit higher than it was in some of the names you usually hear me
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talk about. >> let's move on to your next option. bet the house. that's the question from options traders as casino stocks, mgm and wynn report next week. these stocks have been huge movers on earnings. dan wanted to do some on the ground research before offering his trade. nice excuse, dan. >> i guess being a volatility trader doesn't make a whole lot of sense. if you can be a directional trader and spend the day by the pool. >> you've got a bearish bet on wynn. >> i do. this isn't really that company specific about the fundamentals. the stock is up 50% year to date. it's rallied 300% off this year's lows alone. a lot of that enthusiasm has to do with the recently -- they just ipo'd their macau venture in hong kong. $1.6 billion. the ipo performed very well and now it's come back all the way into the offering price. now trends are obviously a lot
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better in asia. they're okay here in the u.s. not great in las vegas here. they're very levered to las vegas obviously. so one of the things i'm looking at, what's in the stock here. the stock has had a really big run. a lot was enthusiasm about the macau ipo. let me tell you something. las vegas sands and mgm are likely to do the same things with their macau ventures. one of the things i think that could put pressure on wynn's macau ipo in hong kong. if i'm long on stock or want to make a bearish bet, i may think about buying a wynn december 60-50, one buy two put spread. what am i doing? i am buying one december 60 put for $4.50 and selling two december 50 puts for a total of $2.50. that whole package cost me $2.
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>> walk us through how you make money. >> in a one by two put spread my max gain is actually at the lower put strike where i've sold two options, okay? so i've spent $2. the 60 strike, less the $2 in premium i paid, my max gain would be $50. december expiration. that's $8. that's four times your money. that's a pretty good return. between $50 and $42 to the down side, my payoff starts to trail off. and down at $42, worst case scenario, i get long wynn down 30%. >> i can tell you guys are champing at the bit, both of you. scott, why don't you start us off. >> first of all, there are two companies that are the class in this business, and danny has picked one of them. and certainly wynn and vegas sands have flat lined here. they've found value. that said, i don't like to pay money to be long puts here. i do like the fact that he does get long the stock if the stock falls enough. but if i were long the stock
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right now, i would think about selling it, taking some profits, maybe getting back in, rather than a convoluted trade where i would get even longer and have to pay money to do so. >> scott, that makes perfect sense. but the premium is 3.5% of the underlying. if you're long and don't want to sell for tax reasons, this could be a way to mitigate, i don't know, maybe about 10% of your down side in the near term around what could be an event. we talk about this all the time. trading tactically. what do we know? there's going to be some supply coming back on the market in macau ipos. it's the flavor of the month. the las vegas sands and mgm. so here's a trade, you're not spending a whole heck of a lot. >> scott will have his own casino trade in that web extra so do logon to our site and get that trade after the show. time now to make the call where the traders give you the best directional bet. and listen up, if you missed stacey's call on google, you get
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another shot with baidu. the chinese search giant. one share, $440. stacey has a strategy that can give you the same upside for just $11. how do you do this? >> here's a story, it's up 200-plus percent. initially, i was like let me come up with a bearish strategy, protect ourselves coming into earnings. fundamentally, the bullish case actually makes a lot more sense here. there's the chinese market that's improving, potential leverage on their markets given their economies of scales. a lot of things seem to be a positive. the one negative comment that analysts are talking about, and really the only negative comment is valuation, but this company has a really high growth rate so you can argue that a higher valuation is acceptable here. so let's get to the trade. $440. a lot of money to spend. i felt the same way about google. i would much rather spend less money, risk less money and still have an upside position here.
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i was looking at the november 440 strike call offered at $20 and financing that by selling the $470 call paying $11 for that november 440-470 call spread. what am i doing here? i'm spending $11. i'm risking $11 with the potential to make $19 at expiration if baidu is above 470. let's look at the positives and negatives of this trade. the positive i'm spending a lot less money than if i were buying baidu outright. how did i choose this strike? why 470? the market is implying around a 6% movement with baidu. that's kind of what it's averaged over the last four quarters and eight quarters. i wanted to go with something relatively in line with that. 470 gave me a little extra room. if there's anything amazon taught me, give myself a little extra room. i'm pulling a dan here, buying a vertical before an event. which is never my favorite thing. >> dan, she's pulled you into the conversation.
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i know you have a long history when it comes to strategy. dan, why don't you assess what stacey's laid out. >> i'm going to give a similar commentary to her google trade. and i like how she's chosen all her strikes. it makes a lot of sense. the payout ratio is very similar. which is okay, that two to one is not bad. i wouldn't buy this stock with your money. that said, if you can find a good options strategy and you think there's more upside, i think you have to have an edge here. the stock literally traded $100 in february. she's talking about buying a $440 strike call. it sounds insane. it sounds bubbly. i just say to you, looking at the people, use options in stocks like this because you're crazy -- you know, one day you could wake up and this thing could be down $100. >> i have to say a couple quick things, number one, trading google was phenomenal. i don't know if you're going to do it again on baidu. this is one of those situations where you're not risking a great
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percentage in the stock price. and we've seen how some of these tech names have performed coming out of earnings. if this one happens to replicate -- >> at the same time, is the juice taken out of this trade simply because google has already reported and baidu has run up prior? does that change the fundamentals? >> it often can, but one of the things i've learned is that if you try to really think everything is baked in, sometimes you can be wrong. i was wrong about it in the last earnings season. with respect to price line xpedia and orpitz. this could be a similar situation here. i shouldn't have bucked the trend here. >> google was up today with amazon. some other positive comments out there. you've got to take a directional position here, i like to go positive with this one. >> we'll see who comes out on top. coming up next, since apple came out with earnings, shares have rallied 7%. dan had a strategy that returned multiples in less than a week. he will give you the next move after the break.
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time for "pump up the volume" the names heating up options traders sizzle index. founded in 1996 as part of microsoft, this company is now the largest online travel agency in the world, after reporting an increased demand for travelers abroad, options activity in the name was more crowded than o'hare airport. who is it?
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risked less and made more. here's how he did it. on "options action" there's nothing better than risking less to make more. that's what dan did with apple. >> one of the things i want to do is i want to buy a vertical call spread. >> whoa, whoa, whoa, vertical call spread? how about english, dan. he thought apple was a buy heading into earnings. >> apple is a great story.
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we all love the products. >> but he didn't want to spend $19,000 buying 100 shares. >> i don't buy stocks up 100%. >> so instead he bought the november 190 call for $7.80. now, in order for dan to make money, he needs apple stock to rise by more than the cost of the trade or $198 by expiration. anything below that and dan loses money. to spend even less, dan sold the november $200 strike call and collected $4.20. that's what dan meant by a vertical call spread. he bought one call and sold another of the same expiration to reduce the costs. so now we know the lingo. but how do we make money? well, between buying one call and selling the other, dan spent a total of $3.60. so now dan only needs apple stock to rise above $193.60 to
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make money, or the difference between the 190 strike call and the cost of the spread. in fact, dan can profit all the way up to that $200 strike call that he sold. that's where his profits cap out. and that's the tradeoff with buying a vertical call spread. you reduce your costs but you limit your profits to the difference between the call that you bought and one that you sold, minus the cost of the trade. but $3.60? dan, didn't you get the memo? we're trying to risk less to make more. >> the call spreads are actually kind of expensive. do i want to look for something to help finance that trade? >> now you're talking our language. so to lower his costs even more, dan sold the november 175 strike put for $3.40. now if apple stock falls below that put strike price, dan could be forced to buy apple
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stock for $175 on expiration. but he paid virtually nothing to buy his call spread. how is that? let's recap. he started off spending $7.80. to buy one call. he collect the $4.20 to sell another. and then we collected $3.40. selling that put. grand total? 20 cents. how did apple do? >> it is a clear message to the shorts tonight, bite me. >> relax, jim, it's a family show. since the time of the trade, sales of the so-called jesus phone have propelled apple shares 7% higher. with nearly a month until expiration, it is facing a tough choice. close out the spread at a huge profit or wait until expiration and hold out for more. and now "options action" fans are obsessed with a single question, what will dan do now. talk about a high quality problem. so far dan's trade is worth about $740.
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remember, the maximum value of the spread cannot be realized until after expiration. so there is about $240 in time value that dan will make so long as apple stock stays above that $200 level by expiration. okay, dan, everybody wants to know what your next move is. the big question on everybody's mind, did that trade pay for your trip to las vegas? >> i'll let you know tomorrow morning when this whole thing is done. as far as the trade is concerned, i think one of the things, whether the stocks are below 200 or above 200, flip a coin. you put this on in front of the event, you got it right. you take the money and run and you move on as far as i'm concerned. >> i have to give credit where credit is due here, plus my mom says i'm too mean to dan. a great call, dan. i completely disagreed with the down side risk exposure you have here. if you're going to get the direction and the magnitude right, this is a great trade. i 100% agree with you.
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take your money and run. you made a bet going into earnings. what is done is done. from here it's a coin flip. >> i like it when you guys kiss and make up. i really do. send us a question and we will answer it. i do read every e-mail. go to our website. it is your chance to ask the question. our chance to educate you. that is right after the show.
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time now for the final call. gambling man out in vegas, kick it off. >> look at defensive in earnings next week. >> happy birthday to my sis in hawaii. take profits on dan's apple trade. >> scott? >> i like stacey's baidu trade. this is betting on the jockey and not the horse. >> follow dan and stacey. they're right. >> looks like our time has expired. i'm melissa lee. see you back here next week.
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